Rackspace shares tumble 20% on first day of trading after IPO
Shares of business technology company Rackspace tanked on Wednesday following an initial public offering, just like they did in 2008 after a previous IPO.
Rackspace shares fell over 20% to $16.17, a similar performance to their first day of trading 12 years ago.
Similar to how the nation’s economy was reeling from the Great Recession when Rackspace originally went public, the business world is now suffering in the wake of the coronavirus pandemic.
Still Rackspace CEO Kevin Jones was positive during a conversation with Fortune on Wednesday, calling his company’s public debut, which raised $700 million, “one of the largest tech IPOs of the year.” That would include the IPOs of business software company ZoomInfo (which raised nearly $1 billion) and online used-car seller Vroom (which raised about $468 million).
“Today’s Day One,” Jones said.
In 2016, private-equity firm Apollo Global Management took Rackspace private in a deal worth $4.3 billion. That leveraged buyout saddled Rackspace with considerable debt (the company’s total debt is about $3.9 billion), Jones explained. Rackspace plans to use part of the $700 million raised in its IPO to help pay off the debt.
When Rackspace was founded in 1998, it was focused on website hosting services, and by 2008, at the time of its first IPO, it was heavily investing in cloud computing, in which companies sell computing resources on-demand to customers. But Amazon and Microsoft ended up being too much competition for the smaller Rackspace, prompting the company to shift to selling software that helped customers manage multiple cloud computing services, a trendy IT concept known as multi-cloud.
“The company is completely different than we were before we were taken private,” Jones said.
Therefore, Jones no longer views Amazon and Microsoft as competitors. They’re now “my partners,” he said, and an extension of Rackspace’s salesforce and research and development teams.
Still, Rackspace faces tough competition from much larger companies. IBM, Accenture, and Hewlett Packard Enterprise also pitch similar cloud management products—either consulting services, software, or a combination of the two—to help customers control their IT infrastructure.
Jones described Rackspace as being “much more agile” than bigger rivals like IBM, which often sell hundreds of other services and therefore aren’t as specialized.
In Rackspace’s latest quarter ending March 31, overall sales were $652.7 million, a 7.5% year-over-year increase. During that period, it lost $48.2 million, or 16% less than in same quarter during the previous year.
As for taking Rackspace public during a pandemic, Jones acknowledged that it was odd. The traditional IPO roadshow, usually held with potential investors in hotel ballrooms in cities across the country, was done virtually through video-conferencing.
“It would have taken us weeks to fly over the world,” Jones said.
Still, “there’s not as much chit chat and informal relationship building” as there used to be, Jones said before adding, “But I think over time that will get to normal.”